Hawke v Efrat Consulting Services [1999] FCA 412 | Case summary

The Agreement 11 The Agreement is comprised of a letter of offer by FAI dated 30 September 1998 accepted by the Receiver "as Receiver of the Company and on behalf of the Company" on 15 October 1998. The letter of offer is in the following terms: "I am pleased to confirm that FAI is prepared to purchase the cause of action against the Defendant identified in your Proposal dated 7 May 1998 being property of the Company the subject of a registered debenture charge dated 14 April 1986 and numbered 56347 in the registrar of charges held by Maya Efrat. The terms of the proposed purchase agreement are as follows: 1.0 Definitions "Cause of Action": Means the cause of action against the Defendant identified in the Receiver's proposal dated 7 May 1998 to FAI being an action for damages arising out of the termination of an Asset Sale Agreement dated 20 December 1996 and a consultancy agreement dated 10 January 1997. "Counterclaim": Means any counterclaim raised by the Defendant in response to the prosecution of the Cause of Action. "Estimated Fees": The estimated Legal Costs and Disbursements of the Lawyers. "Lawyers": Dunhill Madden Butler and Marcus Clarke. "Lawyers Fee Agreements": The fee agreements between WLG, on behalf of FAI, and the Lawyers concerning the legal costs of prosecuting the Cause of Action and defending any Counterclaim. "Legal Costs and Disbursements": The legal costs and disbursements: (a) identified in the Lawyers Fee Agreements reasonably incurred for the sole purpose of prosecuting the Cause of Action and in defending any Counterclaim from the date of this agreement; and (b) reasonably incurred in obtaining the Court directions as provided in clause 2.1. "Negotiator's Fees": 5% of the Estimated Fees or 3% of the Resolution Sum, whichever is the greater. "Receiver's Fees": The fees of the Receiver up to a maximum amount of $15,000 incurred for the sole purpose of prosecuting the Cause of Action and defending any Counterclaim from the date of this agreement. "Resolution": When FAI receives all or some of the settlement or judgment proceeds in respect of the Cause of Action, which is not subject to a current appeal and which takes into account any set off or Counterclaim. "Resolution Sum": The amount or amounts received or by way of settlement, judgment or order (excluding costs orders relating to costs incurred prior to the date of this agreement) in respect of the Cause of Action after taking into account any set off or Counterclaim. "WLG": The Walker Law Group. "WLG's Management": WLG will assist the Lawyers comply with their reporting obligations; assist the Lawyers account in the agreed manner; ensure FAI makes appropriate payments pursuant to this Agreement; oversee the conduct of the litigation; and issue instructions to FAI's lawyers on behalf of FAI where appropriate. "WLG's Fees": The fees for: (a) WLG's Management Services calculated as 10% of the Estimated Fees; and (b) assessing the Proposal and facilitating this Agreement. 2.0 Condition Precedent (1) It is a condition precedent to this agreement that the Court gives a direction to the effect that the Receiver has the power to validly assign the Cause of Action to FAI on the terms of this agreement. 3.0 Assignment (2) The Receiver hereby assigns to FAI absolutely by way of transfer the whole of the Cause of Action. 3.2 As consideration for the assignment, FAI agrees to pay the Receiver, on Resolution, 70% of the Resolution Sum remaining after subtracting from the Resolution Sum an amount equal to the sum of: 3.2.1 WLG's Fees; 3.2.2 the Legal Costs and Disbursements; 3.2.3 the Negotiator's Fees (if one is appointed to FAI) to assist in settling the Cause of Action; and 3.2.4 the Receiver's Fees. (3) FAI will not charge, permit a lien upon or otherwise encumber the Resolution Sum except with the written consent of the Receiver. 4.0 Covenants (4) The Receiver covenants with FAI that: 4.1.1 The Cause of Action is property of the Company the subject of the registered debenture charge held by Maya Efrat. 4.1.2 other than FAI's obligation arising pursuant to Clause 3.2 and any Counterclaim, the assignment of the Cause of Action is to be taken by FAI free of all encumbrances, liens, claims and interests; and 4.1.3 the Receiver will do all things and will execute all documents as FAI reasonably requires to give effect to this assignment. 5.0 Conduct and Resolution of Action (5) The receiver will make all documents relevant to the Cause of Action in the Receiver's power, possession or control available to FAI and will permit FAI, if it so wishes, to take any such documents into its own possession. 5.2 On behalf of FAI, WLG will provide the Receiver with copies of reports it receives from the Lawyers concerning any significant developments in the prosecution of the Cause of Action and defence of the Counterclaim and will inform the Receiver of any settlement offers made or received. By doing so, FAI does not intend to waive legal professional privilege. 5.3 FAI will pay the Receiver's Fees. Before any obligation to pay arises the Receiver must submit to FAI itemised accounts to the satisfaction of FAI. 5.4 FAI will pay the Legal Costs and Disbursements. 5.5 If FAI and the Receiver disagree in respect of any settlement opportunity or in respect of whether to discontinue prosecuting the Cause of Action, then each part must seek to resolve the disagreement by referring the dispute to an independent party, mutually chosen, for advice and if the dispute continues, then the matter in dispute must be referred to a mediator to be nominated by the Australian Commercial Dispute Centre. 5.6 If a disagreement referred to in clause 5.5 cannot be resolved within two weeks of the disagreement arising, FAI retains an unfettered power to continue to prosecute, settle or discontinue the Cause of Action. 5.7 If it so wishes, FAI may prosecute the Cause of Action and take any enforcement action in the name of the Company and will indemnify the Company against any costs, expenses and liabilities which might arise as a result, except in relation to any Counterclaim unless otherwise provided for in the [sic] this Agreement. 5.8 The Company acknowledges that: 5.8.1 it does not gain any right to the Cause of Action or the Resolution Sum by virtue of the Cause of Action being taken in its name; and 5.8.2 FAI is entitled to have the Resolution Sum, if any, paid to it directly by the Defendant, and the Company will do all things reasonably required by FAI to ensure this occurs. 5.9 If FAI fails to take any steps towards prosecuting or settling the Cause of Action within six months after the condition precedent in clause 2.1 is satisfied, FAI will appoint the Receiver as its agent with authority to prosecute the Cause of Action. In such a case FAI will have no greater liability for the fees of the Receiver, or to indemnify the Receiver in respect of any costs or liabilities other than as expressly provided for in this Agreement. 6.0 Counterclaim (6) Except to the extent that the amount of any Counterclaim may be set off against any judgment or settlement in respect of the Cause of Action, FAI will not be liable for the amount of any Counterclaim. 6.2 Subject to clause 6.3 FAI will indemnify the Receiver against any costs order made in respect of any Counterclaim for costs from the date of this Agreement. 6.3 If the Cause of Action is discontinued or settled or judgement [sic] is obtained in respect of it (by either party), then FAI may terminate: 6.3.1 its obligation to pay the Receiver's Fee and the legal Costs and Disbursements of defending any Counterclaim for any fees, costs and disbursements arising after the date of termination; and 6.3.2 its obligation under clause 6.2 for any costs arising after the date of termination. 7.0 Appeal (7) If the Cause of Action is subject to an appeal by the Defendant then: (8) FAI is under no obligation to make any distributions or payments from the Resolution Sum until the appeal is withdrawn or otherwise determined; and 7.1.2 FAI may determine in its absolute discretion whether to defend the appeal. 8.0 Stamp Duty FAI will pay the stamp duty on this agreement. 9.0 Law (9) This Agreement is to be construed in accordance with and governed by the laws of the State of Victoria and the parties submit to the jurisdiction of the Courts of that State. 10.0 Acceptance 10.2 Please acknowledge your acceptance of these terms by signing and returning a copy of this letter to me and The Walker Law Group. 12 The issue which the Court is asked to determine is whether the Agreement is illegal and void as contrary to public policy on the ground that its making or performance involves or will be in aid of maintenance and champerty. 13 This application for directions has appropriately been made ex parte (Bank of Melbourne Ltd v HPM Pty Ltd (In Liquidation) (1997) 26 ACSR 110 at 113). Any direction which the Court gives will not bind those who will be respondents to any action brought in the name of the Company or FAI or both. However, if the Receiver has made full and fair disclosure to the Court of the material facts, it would appear that, by analogy with the position of a liquidator, such direction will protect the Receiver from liability for any alleged breach of duty as receiver to a creditor, a contributory of the Company or the Company in respect of anything done by him in accordance with the direction. (Re GB Nathan and Co Pty Ltd (In Liquidation) (1991) 24 NSWLR 674 at 679; Re Movitor Pty Ltd (In Liquidation) (1996) 64 FCR 380 at 383).

Consideration 14 The Agreement is in different terms to the "insurance agreements" the subject of consideration by Drummond J in Re Movitor Pty Ltd, Lindgren J in Re Tosich Construction Pty Ltd (1997) 73 FCR 219 and Bryson J in Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294. The "insurance agreements" considered in those cases provided, in general terms, for the "insurer" to fund certain litigation in return for a share of the proceeds of the litigation. The Agreement in this case provides for the assignment to FAI of the Cause of Action rather than merely the disposal of a share of the proceeds of litigation on the Cause of Action. It is thus closer to the agreement considered by Hansen J in UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (1996) 14 ACLC 1262 than to the "insurance agreements" considered in the other cases which I have mentioned. 15 The Agreement is to be construed in accordance with, and governed by, the laws of Victoria. Section 32 of the Wrongs Act 1958 (Vic) ("the Wrongs Act") provides as follows: "32. Abolition of liability in maintenance or champerty (10) No person shall be liable in tort for any conduct on account of its being maintenance or champerty as known to the common law except in the case of a cause of action accruing before the commencement of the Abolition of Obsolete Offences Act 1969. (11) The abolition of criminal and civil liability for maintenance and champerty shall not affect any rule of law as to the cases in which a contract is to be treated as contrary to public policy or as being otherwise illegal and any contract which would have been illegal and void before the commencement of the Abolition of Obsolete Offences Act 1969 on the ground that its making or performance involved or was in aid of maintenance or champerty shall continue to be illegal and void after the said commencement". 16 It may be noted that the common law crimes and torts of maintenance and champerty have also been abolished in New South Wales and South Australia (Maintenance, Champerty and Barratry Abolition Act 1993 (NSW); Criminal Law Consolidation Act 1935 (SA)). 17 Section 32(2) of the Wrongs Act nonetheless makes it necessary in this case for consideration to be given to whether the Agreement is an agreement for maintenance or champerty and thus illegal and void as contrary to public policy. 18 The submissions made on this application did not touch on the question of the proper construction of the second part of s 32(2) of the Wrongs Act. The extent to which the attitude of courts towards agreements to maintain litigation has been influenced over time by changing considerations of public policy is discussed below. On one view, the reference to "any contract which would have been illegal and void before the commencement of the Abolition of Obsolete Offences Act 1969" may be thought to have a temporal operation so as to require that the validity of a contract be determined according to the approach of the common law to maintenance and champerty in 1969. It would, after all, have been relatively simple for the drafter of the subsection to have referred to "any contact which would have been illegal and void had the Abolition of Obsolete Offences Act 1969 not been enacted" if that had been the intended operation of the subsection. I raise this issue because of the invitation of counsel for the Receiver, Mr Coles QC, to consider for myself the extent to which public policy currently demands that contracts of maintenance be generally regarded as illegal. On the approach which I have taken, however, it is not necessary for me to reach a firm view as to the proper construction of s 32(2) of the Wrongs Act. 19 In Magic Menu Systems Pty Ltd v AFA Facilitation Pty Ltd (1997) 72 FCR 261 at 267 the Full Court of this Court considered the history of the torts of maintenance and champerty. It observed: "Maintenance, which consisted of the assistance or encouragement of a party to an action in which the maintainor had no interest, was regarded by the English law, from an early time, as a crime punishable by fine or imprisonment. It later became recognised as a civil wrong." (See generally Blackstone's Commentaries (5th ed), Book IV, p 134). Champerty was a species of maintenance, on terms that the maintainor and the plaintiff would share in the outcome of the action. It was especially feared because the champertor's financial stake in the litigation provided a strong temptation to suborn witnesses and pursue worthless claims." (See Barratry, Maintenance and Champerty, New South Wales Law Reform Commission Discussion Paper 36, May 1994). 20 Indeed, it appears that doctrines equivalent to maintenance and champerty formed part of the laws of ancient Greece and Rome (see Max Radin, "Maintenance by Champerty" (1935-36) 24 Calif L. Rev 48, at pp 51-52). In examining the background against which the law of maintenance and champerty developed in England, Radin states at 65-66: "There were … two elements in the structure of medieval English society which made champerty and maintenance matters that required special attention. Maintenance may be said to be the last flaring up of feudalism. It contains echoes of the system of private war and constituted the last of the attempts of the feudal landowners to create within the limits and the framework of the regnum, a continuance of the centrifugal tendencies inherent in the feudal theory. Champerty, on the other hand, had its source in the resistance to the slowly growing capitalism that followed the Renaissance of the eleventh and twelfth centuries. It got its name in England from a specifically feudal institution [ie tenancy by champerty] that lent itself most easily to the evasion of the laws against usury, and may have disappeared as a feudal tenure because it did so. If we add to these two the clerical opposition to litigation in general - particularly litigation in the secular courts - we have the background against which the law of champerty and maintenance grew up." 21 The Full Court noted in Magic Menu Systems Pty Ltd at 267-268 that public policy considerations have continued to shape the law as it is concerned with maintenance and champerty, gradually alleviating its strictness. It has been observed that laws concerning the provision of legal aid show the extent of change in public opinion on the question of supporting litigation (per Lynskey J in Baker v Jones [1954] 1 WLR 1005 cited by Danckwerts J in Martell v Consett Iron Co Ltd [1955] 1 Ch 363 at 386). As the Full Court pointed out in Magic Menu Systems Pty Ltd at 267: "What maintained actions were thought likely to produce, and which was inimical to the public interest, altered over the course of time and with changing social conditions, as did the recognition of interests which were sufficient to justify interference in another's litigation by supporting it …. It may now be observed, for example, that concerns expressed earlier this century, as to the potential for the maintenance of actions to give rise to an increase in litigation, may now be considered of lesser importance than the problems which face the ordinary litigant in funding litigation and gaining access to the Courts." 22 It may further be noted that the wide jurisdiction relating to costs of many Australian courts, including the Federal Court, extends to ordering the payment of costs by third parties (Knight v FP Special Assets Ltd (1992) 174 CLR 178; Caboolture Park Shopping Centre Pty Ltd (In Liquidation) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224). In Abraham v Thompson [1997] 4 All ER 362 the Court of Appeal has indicated that it may be appropriate for a court to exercise its jurisdiction to order a maintainer to pay the costs of a maintained action. It may well become the position that the extensive powers of courts to formulate orders for costs which meet the circumstances of the particular case is seen as sufficient protection of the public interest so far as third party assistance or encouragement of litigation is concerned (see Prof. I R Scott, "Towards Understanding the Maintainer's Liability for Costs" (1995) 14 Civil Justice Quarterly 271). However, that position has not yet been reached. The authorities constrain me from accepting an invitation to anticipate possible future developments concerning the circumstances, if any, in which an agreement may be found to infringe public policy concerning maintenance and champerty. 23 It is presently settled law that, subject to certain exceptions, an assignment of a bare cause of action, in the sense of a right merely to recover damages, to a person who does not have a genuine and substantial interest in the cause of action involves "trafficking in litigation" and the agreement to assign and the assignment are champertous and unenforceable (Trendtex Trading Corporation v Credit Suisse [1982] AC 679 per Lord Wilberforce at 694-695 and Lord Roskill at 703). 24 In the present case it is not suggested that FAI has a genuine and substantial interest in the Cause of Action. The Agreement will thus be contrary to public policy as offending the rules against maintenance and champerty unless it falls within a recognised exception to such rules. Unless the Agreement falls within such an exception the Receiver will not be entitled to a direction from the Court that he has the power to enter into the Agreement. 25 In Re Tosich Construction Pty Ltd Lindgren J, in considering an application by a liquidator for directions as to whether he had power to enter into an insurance agreement with FAI pursuant to which FAI would pay the costs of prosecuting a legal claim, reviewed recent authorities concerning exceptions to the maintenance and champerty rules. His Honour noted at 227 that two exceptions to such rules had featured in recent cases: the "genuine commercial interest" exception and the "statutory power of sale" exception. Only the "statutory power of sale" exception has been suggested to have any relevance in the circumstances of this case. 26 It is well established that the statutory power of a trustee in bankruptcy to sell "all or any part of the property of a bankrupt" authorises the trustee to sell a chose in action which is the property of the bankrupt in circumstances which would otherwise attract the rules against maintenance and champerty (Guy v Churchill (1888) 40 Ch D 481; Ramsey v Hartley [1977] 2 All ER 673; Re Nguyen; Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320; Re Cirillo; Ex parte Official Trustee in Bankruptcy (1996) 65 FCR 576). 27 It is similarly well established that the statutory power of a liquidator of a company to "sell or otherwise dispose of … all or any part of the property of the company" empowers the liquidator to enter into arrangements which would otherwise offend the rules against maintenance and champerty (Re Movitor; UTSA Pty Ltd v Ultra Tune Australia Pty Ltd; Re Tosich Construction Pty Ltd; Re William Felton & Co Pty Ltd; Bank of Melbourne Ltd per Lee J). A liquidator's powers to enter into arrangements to sell the property of a company are not dependent upon the property having vested in the liquidator, it is sufficient that such property is taken into the custody of the liquidator or under his or her control (Brookfield v Davey Products Pty Ltd (1996) 14 ACLC 303 at 307; UTSA Pty Ltd v Ultra Tune Australia Pty Ltd at 1277-8). 28 In Re Movitor Drummond J observed at 390: "There is, in my opinion, no reason for denying to a liquidator exactly the same power as is possessed by a trustee in bankruptcy to dispose of a bare right of action to a stranger either for a cash payment or on terms that the stranger will pay to the company part of the proceeds of the litigation." 29 In UTSA Pty Ltd v Ultra Tune Australia Pty Ltd Hansen J observed at 1278: "In my opinion, the assignment of a cause of action (which is clearly within the definition of "property" in s 9 of the Corporations Law) by a liquidator is valid notwithstanding that such an assignment might otherwise be held void for maintenance or champerty, or because it purports to assign a bare right of action." 30 Neither the research of counsel, nor my own, has identified any authority on the power of a receiver of property of a corporation to assign a bare cause of action which constitutes or is part of that property. 31 It may be observed, however, that the power of trustees in bankruptcy and liquidators to sell choses in action in circumstances that would otherwise involve "trafficking in litigation" and thus offend the rules against maintenance and champerty has been found to be firmly based in their statutory power to sell the property of the bankrupt or the company as the case may be. As Hansen J said in UTSA Pty Ltd v Ultra Tune Australia Pty Ltd at 1278: "Simply put, it is the statutory empowering of the liquidator to sell the company's causes of action which creates the exception or exemption, which itself is based in part on the assumption that Parliament could not have intended to empower a liquidator to do something which would be unlawful if no exception or exemption was implied." 32 The statutory power of sale given to a liquidator by the Corporations Law is contained in s 477(2)(c) in the following terms: "(2) Subject to this section, a liquidator of a company may: … (c) sell or otherwise dispose of, in any manner, all or any part of the property of the company." 33 The statutory powers of a receiver of property of a corporation in respect of that property are contained in s 420 of the Corporations Law. So far as is here relevant, s 420 provides as follows: "(1) Subject to this section, a receiver of property of a corporation has power to do … all things necessary or convenient to be done for or in connection with, or as incidental to, the attainment of the objectives for which the receiver was appointed. (12) Without limiting the generality of subsection (1), but subject to any provision of … the instrument under which, the receiver was appointed, being a provision that limits the receiver's powers in any way, a receiver of property of a corporation has, in addition to any powers conferred by that … instrument … or by any other law, power, for the purpose of attaining the objectives for which the receiver was appointed: (a) to enter into possession and take control of property of the corporation in accordance with the terms of that … instrument; (b) to lease, let on hire or dispose of property of the corporation; … (g) to convert property of the corporation into money; … (13) In this section, a reference, in relation to a receiver, to property of a corporation is, unless the contrary intention appears, a reference to the property of the corporation in relation to which the receiver was appointed." 34 So far as the power to dispose of property is concerned, despite the differences in the wording of the two sections, I am not able to discern any significant difference in the nature or extent of the powers created by ss 477 and 420 respectively of the Corporations Law. 35 The property in relation to which the Receiver was appointed under the Debenture was: "the whole of [the Company's] undertaking and all other property and assets whatsoever and wheresoever both present and future whether realty or personalty (including in "the personality" the goodwill of its business its plant and stock its book debts and other choses in action) and the uncalled and called but unpaid capital for the time being of the [Company]." 36 I see no reason to doubt that the Cause of Action is property of the Company in relation to which the receiver was appointed within the meaning of s 420 of the Corporations Law. 37 It may be noted, however, that the statutory powers given to a receiver by s 420(2) of the Corporations Law are powers "in addition to any powers conferred by" the instrument under which the receiver was appointed. Clause 13 of the Debenture under which the Receiver was appointed gives the Receiver power: "(f) whether in or out of possession to absolutely sell exchange or dispose or concur in the sale exchange or disposal of the property hereby charged or any part or parts thereof …". 38 I conclude therefore that the Receiver's general power of sale of the property of the Company derives not from s 420 of the Corporations Law but from clause 13 of the Debenture. That is, in contrast to a liquidator, the Receiver's general power of sale is not a statutory power but a contractual power. 39 Plainly the parties to the Debenture could not by agreement alter or affect the law as to the circumstances in which a contract is illegal and void as contrary to public policy. The Receiver's general power of sale, which is derived from clause 13 of the Debenture, is thus insufficient to authorise him to enter into an arrangement which offends the rules against maintenance and champerty. 40 Does s 420(2) of the Corporations Law disclose an intention to expand the powers of sale of a Receiver in such circumstances so as to allow the Receiver to enter into an arrangement to dispose of a cause of action in circumstances which would otherwise offend the rules against maintenance and champerty? 41 I have concluded that s 420(2) does disclose such an intention. First, I am unable to identify any reason of principle why a receiver's powers of sale should ordinarily be more restricted in this regard than a liquidator's powers of sale. Indeed, a comparison of the terms of ss 420 and 477 of the Corporations Law seems to me to suggest against any such intention in the legislature. Moreover, if it be the case that a receiver appointed under an instrument that contained no reference to a power to sell property would, by reason of s 420(2), receive statutory power to sell a chose in action in circumstances which would otherwise attract the rule against maintenance and champerty, it would, in my view, be an oddity if a receiver appointed under an instrument that contained an express power of sale received no such power. 42 I conclude that in the circumstances of this case, s 420(2) of the Corporations Law gives the Receiver, in addition to the powers of disposal conferred on him by the Debenture, the power to dispose of the Cause of Action in circumstances that would otherwise offend public policy concerning maintenance and champerty. 43 In Brookfield v Davey Products Pty Ltd at 307 I expressed the view that where property of a company has not vested in the liquidator, the appropriate party to a sale of any part of the property of the company is the company rather than the liquidator. By analogy of reasoning, the appropriate party to a sale of property in relation to which a receiver has been appointed will ordinarily also be the company (s 420(2)(a) of the Corporations Law). In this case the Receiver has accepted the letter of offer of FAI, which identifies the Cause of Action as "property of the Company", "as Receiver of the Company and on behalf of the Company". I conclude that the Agreement is an agreement between the Company and FAI, it being within the powers of the Receiver to act on behalf of the Company in accepting the offer of FAI. 44 There will be a direction as sought in the application that the Receiver has the power to enter into the Agreement. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson.

Hawke v Efrat Consulting Services

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